Not all banks offer childrens savings accounts such as the Orange4Kids from ING Direct. However, most major financial institutions do offer custodial savings accounts which can be another good option to consider for childrens savings.
Before you consider a custodial account, you need to understand how they work. They’re not exactly straight forward. Here are 14 things you need to know about custodial savings accounts that can help you make a decision whether or not one is right for your child.
- UGMA and UTMA accounts are also called custodial accounts.
- The Uniform Gifts to Minors Act (UGMA) provides a way for parents, relatives or friends to gift money or securities to minors.
- The Uniform Transfers to Minors Act (UTMA) provides a way to gift other types of gifts to minors such as property.
- Custodial accounts may include bank savings accounts, certificates of deposit, mutual funds and brokerage accounts. Assets such as real estate may also included.
- The custodian (legal parent or guardian) controls the account until the minor turns 18.
- The money in the account belongs to the child and income is reported under the child’s social security number.
- Such accounts can be used to reduce the adult’s estate and the taxes owed on investments which is attractive for many adults.
- There is no ceiling on how much you can transfer to a child through a custodial account.
- Once you transfer the gift it is irrevocable. In other words, you can’t take the money back because it belongs to the child.
- It’s easy to withdraw the money as long as it’s being used for the child such as buying a car.
- There are no limits on how much can be withdrawn.
- Children are free to spend the money however they please when they gain control. They are not restricted to educational expenses such as with the 529 plan.
- Custodial accounts may not be a good option if your child is going to apply for financial aid as it could impact the amount of aid they are eligible to receive
- Speak to a tax professional to consider taxes implications. Based on earnings a child may pay no tax, the child’s tax rate or the adult tax rate.
If your goal is to put aside a little money for your child to be used for expenses (such as a car) other than college and gifts from family and friends, a custodial savings account is a great option to consider. If your main objective is saving for college, consider a 529 plan, so you can get the tax benefits.
To open an account have the required information for the minor and adult and make a donation. Custodial accounts with Discover Bank and Ally Bank are good options to consider as they offer competitive rates of return.
Additional articles about custodial accounts: Good Financial Cents; SmartyMoney; Scholarships.com; Fool.com; BabyCenter
